Observing honesty in business

In How to Spot a Liar (at HBS Working Knowledge), researchers claim that they’ve uncovered key linguistic cues that can help reveal dishonesty during business negotiations, whether it’s a flat-out lie or a deliberate omission of key information.

It’s an ancient and complicated subject. Other research has shown that stand-alone behaviors or ticks aren’t reliable indicators, but patterns – or breaks in patterns – may be.

In our business dealings (as opposed to a poker table) we put a premium on transparency, as it’s easier to remember the importance of being honest when everyone involved in a business relationship can observe how decisions are being made.

This research gives us an opportunity to revisit the subject of when business promotes honesty. Three years ago we cited this article from The Independent Institute, which argues that businessmen are more honest (or less dishonest) in their dealings than preachers, politicians, and professors:

Businessmen interested in long-run survival are more honest in their professional dealings than are many other groups in society—not because they are more virtuous, but because they face more effective constraints. Their customers can usually detect and avoid deception more easily than can a politician’s constituents, a professor’s students, and a preacher’s congregants…

It turns out that, because most businesses are profitable only by earning the patronage of returning customers, they have stronger incentives to be truthful than do preachers (“no one can ‘test drive’ a preacher’s most important promise,” Lee observes), politicians (for whom elections are sporadic and often predetermined by gerrymandering and other devices), or professors (whose customers, the students, “often do not care much about the honesty of the professors’ claims”)…

Yet as long as people continue to embrace beliefs out of comfort or convenience, opportunities will exist for someone to profit by making claims that are intentionally misleading – that is, by acting dishonestly. Such dishonesty will arise in business, religion, politics, and academics, as some practitioners in those areas yield to the temptation to take advantage of the possible profits. From this observation, I have made three arguments:

First, the costs and benefits of determining the accuracy of claims being made differ in the four occupational areas considered.

Second, in business the costs of determining honesty are smaller and the benefits greater than in the other three areas.

Third, the lower the costs and the greater the benefits of determining honesty, the more restricted are the opportunities to profit from dishonesty – and the less dishonesty will surface.

Base on these arguments, my conclusion is that, as a rule, businessmen are more honest than preachers, politicians, and professors when making claims about their products.

In the same piece we quoted Will Harrell of CapCo Asset Management, who wondered why, if business does promote honesty, the dishonest players aren’t forced out over time:

There ought to be a Darwinian element to it: where trust or consistency matters, the “good” should attract all the business from the “bad.” Like bad genes, bad practices should be competed away.

However – bad pennies have a habit of always turning up, and in some cases, thriving. Perhaps the particular transaction is not repetitive enough, like a car or home purchase;or perhaps customers attach insufficient value to character or are buying a credence good, one whose quality they lack the expertise to judge for themselves even after experiencing it. (Like most professional services, including mine.) Of course, some customers rely too heavily on price alone: the repairman who intends to rip you off can rationally charge less than the honest one who intends to actually do the work and needs to price accordingly.

It’s a fascinating question, with huge implications. It would be a real political plus for capitalism if more people understood it.

So perhaps it is still useful to know how to spot a liar – whether the tips come from the Ivy League or Nabisco.